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TDS Processing

TDS processing stands for ‘Tax Deducted at Source‘. It was introduced to collect tax at the source from where an individual’s income is generated. The government uses TDS as a tool to collect tax to minimize tax evasion by taxing the income (partially or wholly) at the time it is generated rather than at a later date.

TDS is applicable on various incomes such as salaries, interest received, commission received, dividends, etc.

TDS works on the concept that every person making specified type of payments to any person shall deduct tax at the rates prescribed in the Income Tax Act at source and deposit the same into the government’s account.

TDS does not apply to all incomes and persons for all transactions. Different TDS rates have been prescribed by the Income Tax Act for different payments and different categories of recipients. For example, payment of redemption proceeds by a debt mutual fund to a resident individual is not subject to TDS but for a Non-resident Indian is subject to TDS.

The person who is making the payment is responsible for deducting the tax and depositing the same with the government. This person is known as a ‘deductor’. On the other hand, the person who receives the payment after the tax deduction is called a ‘deductee’. Form 26AS is a statement that shows the amount of tax deducted and deposited in a person’s name/PAN in a particular financial year.

How TDS works

The entity making a payment (which is subject to TDS) deducts a certain percentage of the amount paid as tax and pays the balance to the recipient. The recipient also gets a certificate from the deductor stating the amount of TDS. The deductee can claim this TDS amount as tax paid by him (i.e. the deductee) for the financial year in which it is deducted.

The deductor is duty-bound to deposit the TDS with the government. Once deposited this amount is reflected in the Form 26AS of individual deductees on the TRACES website linked to the income tax department’s e-filing website.

 

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